Pertaining to
- Topic: International Financial Markets, in Unit 2 of the course International Finance at M.Sc.(Economics) Programme
- Topic: Bond Offering, in Unit 3 of the course Principles of Investment Banking in Banking and Finance specialization at M.Sc.(Economics) Programme
- Topic: Risk and Uncertainty, topic 4, in Economics Discipline specific paper of Ph.D. coursework
- Topic numbers 3, 4, 5 and 7 of unit 2, in Commerce Discipline specific paper of Ph.D. coursework
Financial Market has two components in terms of investment horizon: money market (short term) and capital market (long term). The capital market has broadly two components in terms of types of securities for investment: debt market and stock market. Each of money market and debt market has two components from issuer view point: corporate and sovereign. In money market the corporate issues are commercial papers and certificates of deposits and the sovereign issues are treasury bills. In debt market, the corporate issues are corporate bonds and debentures and the sovereign issues are the securities issued by the central and state governments.
Education on stock market: As the investors are watching minutely the movements of stock index during COVID 2019 lockdown period, technical analysis is rapidly gaining attention. During the economic downturn, the trained eyes of experienced analysts read the market psychology and discern concentration of demand, if any, that can support the fall of the asset. The need to supplement the education on technical analysis with the education on portfolio management arises here otherwise striking a balance between resistance and support is not a cup of tea of the trader or investor. There are three categories of investors as per risk appetite: risk lover, risk averse and risk neutral. The ability to craft a diversified portfolio with a prospective return commensurate with the investor’s risk appetite and at the same time the ability of reading the movements of the securities and their sensitivity to changes in the market index demand a blend of skills of portfolio management and technical analysis. Apart from these technical skills, the ability to examine and predict the changes in the macroeconomic fundamentals that can affect the sector specific stocks in short run as well as in long run adds to the success in portfolio building. In one line, courses on technical analysis, portfolio management and macroeconomic environment of business are pre-requisites to investing and trading in stock market with profit motive.
Education on debt market: Because of lock down facing major part of the industries, except FMCG, pharmaceuticals, internet service providers, hospital and education industries, most of others are likely to register losses during the first quarter of the ongoing fiscal year. As usual their stocks are expected to look down. Those on the buy side are likely to look at debt in lieu of stocks this time. In India floating rate debt instruments are not popular. The buyers by and large go for fixed rate or fixed income instruments. The debt market in India is not as deep as is the stock market and the education on the debt portfolio management is used to find difficulties in getting a space in the basket of courses that an would-be financial market professional opts for. The importance of fixed income investment as a safe haven amidst stormy financial markets pari passu with economic downturn is discovered through a series of financial institutions’ crises like Orange County, Barings Bank and Long Term Capital Management following which was the birth of Basel Accord in 1998. Hence the inverse relationship between yield and price of a fixed income product is unknown to commoners. Risk lovers may incline toward corporate bonds because they love to burn fingers with risk in exchange for higher return than do the sovereigns offer but other categories bend on gilts. However the risk neutral and the risk averse are not likely to rush after the corporate bonds. As a result prices of outstanding government securities or G-secs are on the rise. The rise is reflected by steady fall of the benchmark 10 year government security yield during the lock down period and subsequently fixing the cut off yield of the new 10 year G-sec at 5.79% in early May 2020 by the Reserve Bank of India. So education on fixed income portfolio management is a pre-requisite to designing a debt portfolio that balances between risk free instruments as well as high-return risky papers.
Education on Credit Rating and Credit Risk Modelling: If both of domestic stock market and debt market offer gloomy prospects, an investor can opt for hybrid instruments onshore as well as offshore. For this, she needs education on credit rating and credit risk modelling. An investor in the financial market can go for stocks and bonds of rated issues available for trade in exchange houses, there are some hybrid products available in the onshore over the counter markets and available through merchant banks like preference shares and convertible debentures. Some hybrid products are available in the offshore exchange houses like Indian dollar-denominated convertible bonds in the Hong Kong Stock Exchange. All these are issued by corporate entities. Generally they offer higher returns than do plain vanilla instruments but an investor should scrutinize the issuer’s history and performance, both of which should reflect in credit rating. So the knowledge on credit rating criteria and methods are prescribed supplements if the investor prefers to judge an issue through the character of the issuer rather than simply comparing its performance with other issues in the same sector and same category. All these ‘do’s and ‘donot’s work well till there is no moral hazard in the principal-agent relationship between rating agencies and their client issuers and there is no case for rating shopping like one in 2008 connected to subprime mortgage bonds in USA and one in 2018 in India connected to ILFS non convertible debentures. In such cases the investor needs to carry out an internal credit rating exercise using credit risk models with a pinch of information economics and accordingly make a conclusion whether to go for a hybrid product.
Suggested Readings
- Fabbozi, F.(Ed.). Handbook of Finance, Volume I, Wiley & Sons
- Saunders A and Cornett M, Financial Institutions Management: A Risk Management Approach, McGraw-Hill
- Hull J, Options, Futures and Other Derivatives, Prentice Hall
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